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Loan Policy and Lending Supervision

Loan Policy and Lending Supervision. New England Directors College 2007. Session Objectives. Discuss importance of lending to institutions Review and discuss roles of outside directors in supervising an institution’s lending activities

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Loan Policy and Lending Supervision

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  1. Loan Policy and Lending Supervision New England Directors College 2007

  2. Session Objectives • Discuss importance of lending to institutions • Review and discuss roles of outside directors in supervising an institution’s lending activities • Discuss importance of lending policies and convey elements of a sound Loan Policy • Provide for an open forum for questions and dialogue involving lending policies and credit issues

  3. Why is Lending Important? • Major Portion of the Asset Structure • Have largest Impact on Earnings • Greatest Credit Risk and Potential Loss • Loan Losses/Fraud Cause MOST Bank Failures

  4. Director Loan Responsibilities • Establish/Enforce Sound Underwriting , Administration, and Monitoring Programs • Monitor Loan Portfolio Credit Quality, Portfolio Composition, and Provide for an Adequate Allowance for Loan and Lease Losses (ALLL) • Evaluate Large and Problem Loans • Evaluate and Approve New Lending Products

  5. Establish/Enforce Sound Programs • Establish effective formal policies and procedures • Clear responsibilities and roles for all lending personnel • Guidelines and standards for all approved lending areas • Credit approval process and independent loan review program • Internal controls over lending activities • Management reporting and ongoing supervision • Compliance with applicable laws and regulations • Ongoing review of effectiveness of established policies/procedures

  6. Establish/Enforce Sound Underwriting, Administration, and Monitoring Programs • Ensure that Loan Officers and Operating Management adhere to established guidelines • Loan Policy exception reporting and tracking • Independent Credit Review and Audit coverage • Performance of loan personnel • Ensure appropriate Credit Administration is in place • Consistency, completeness, and accuracy of loan proposals • Accuracy and completeness of management reporting • Compliance with applicable internal policies, laws, and regulations

  7. Monitor Loan Portfolio Credit Quality, Portfolio Composition, and Adequacy of the ALLL • Analyze Watchlist/Problem Credits and Past Due Levels and Trends • Volume comparisons to prior periods • Comparison to peer banks, industry analysis • Analyze Loan Grades Levels and Trends • Weighted Average Risk Rating level and trends • Migration Analysis

  8. Monitor Loan Portfolio Credit Quality, Portfolio Composition, and Adequacy of the ALLL • Identify and Analyze Credit Concentrations and Concentration Risks • Related borrowers • Industries • Geography • Loan type • Independent Credit Review Results • Determine Adequacy of the ALLL

  9. Evaluate Large and Problem Loans • Evaluate current credit quality, project likelihood of future performance, and make appropriate credit decision • Identify and fully understand 5 “P’s” of credit (people, purpose, payment, protection, and prospects) • Ensure initial loan grade is accurate • Evaluate loan pricing/profitability • Evaluate compliance with internal policies and applicable laws and regulations • Evaluate adherence with Strategic Plan and lending objectives • Evaluate credit’s impact on portfolio credit quality

  10. Evaluate and Approve New Lending Products • Perform appropriate due diligence prior to approval • Identify applicable risks/potential rewards • Review outstanding regulatory guidance and industry information • Interview peers who already engage in this activity • Investigate vendors • Determine operating management’s ability to effectively institute and administer the new activity

  11. Evaluate and Approve New Lending Products • Establish formal guidelines and programs • Develop formal policy guidelines and conditions • Place limits on aggregate activities • Provide for ongoing monitoring of activity, including establishing standards for determining success or failure of activity • Develop exit strategy to use, if necessary

  12. Evaluate and Approve New Lending Products • Perform ongoing monitoring and evaluation • Segregate new activities and monitor performance • Compare to initial projections and industry information • Decide whether to continue with activity or exercise exit strategy

  13. Why are Loan Policies Important? • Establish authority, rules, and framework with which operating management is to operate and administer the loan portfolio • Convey the Board’s tolerance for risk • Provide for measurable goals and standards.

  14. Elements of a Sound Lending Policy • General Fields of Lending • Trade/Market Area • Board Responsibilities/Lending Authorities • Portfolio Mix and Risk Diversification • Terms and Conditions • Collateral Requirements • Interest Rate Setting Process

  15. Elements of a Sound Lending Policy • File Maintenance/Documentation • Loan Review and Grading Systems • Real Estate Appraisal Activities/Controls • Collection Procedures • Overdrafts • Loan Loss Reserve • Environmental Liability

  16. Elements of a Sound Loan Policy Handout

  17. Real Estate Appraisal Program • Formal Policies and Procedures should address: • Transactions requiring an appraisal or evaluation • Type of Loan • Dollar Thresholds • Importance of real estate collateral • Appraiser experience/qualifications needed • Minimum appraisal or evaluation standards • Sound underwriting practices • Uniform Standards of Professional Appraisal Practice Guidelines • Compliance with FDIC Rules and Regulations Part 323 and Interagency Appraisal and Evaluation Guidelines

  18. Real Estate Appraisal Program • Formal Policies and Procedures should address: • Approved appraisers • Due diligence (sample reports, certifications, references) • Approved appraiser list • Ongoing monitoring • Documentation • Ordering process • Independence • Prohibition in seeking desired value (verbally or on ordering form) • Review program • Independence • Appropriate knowledge/training • Standardized form/documentation • Return/dispute resolution process

  19. Loan PolicyCase Study

  20. Loan Policy Case Study • Is Policy Guidance Sufficient? • If not, • What areas are not adequately addressed? • What are risks of not having adequate guidelines in those areas? • What guidelines should be added (with examples)?

  21. Loan Policy Exceptions • Should be clearly identified • Loan review/approval forms • Credit files • Should be approved by appropriate level of management • Should be tracked and monitored • Analysis of Portfolio Credit Quality • Evaluation of Lending Personnel • Effectiveness of Current Lending Policies • Handout (example of tracking form)

  22. Session Objectives • Discuss importance of lending to institutions • Review and discuss roles of outside directors in supervising an institution’s lending activities • Discuss importance of lending policies and convey elements of a sound Loan Policy • Provide for an open forum for questions and dialogue involving lending policies and credit issues

  23. Questions?

  24. Thanks for Attending!!!

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